Defensive telcos provide shelter amidst market rout

Valuations are now more attractive after sharp sell-offs.

Telecommunications stocks have emerged as defensive shelters after suffering a sharp sell-off in recent weeks.

According to UOB Kay Hian, telco stock prices are now more palatable after the recent share price corrections, while the downside from a reversal of yield compression has reduced significantly.

“Telcos are sturdy defensive stocks because demand for telecommunications services, being a basic necessity, is inelastic. Telcos in Singapore also have low gearing levels based on net debt/EBITDA,” said UOB Kay Hian.

UOB Kay Hian believes that Singtel offers the best risk-reward trade-off because it has the highest average upside of 21.5%, and the lowest average downside of 31.6%.

“We started the year with many investors being complacent on the impact from the potential entry of a fourth mobile operator. The correction of 27.3% for M1 and 17.7% for StarHub from their recent peaks has skimmed the froth in share prices,” said the report.